A paper by two senior functionaries of the insolvency regulator has proposed an amendment to the bankruptcy law to explicitly mandate the consideration of ESG (environmental, social and governance) factors during the evaluation of resolution plans for stressed firms given the growing global focus on sustainability.

The paper by Sudhakar Shukla, full-time member of the Insolvency and Bankruptcy Board of India (IB- BI), and Asit Behera, manager handling insolvency resolution at the regulator, also proposed that the role of the insolvency professional be expanded to consider ESG risks and opportunities for the bankrupt firm undergoing a restructuring process.

Titled “The Case for ESG Integration in Insolvency and Restructuring, the paper marks the first time senior functionaries of the regulator have explicitly endorsed ESG focus in insolvency resolution.

The paper suggested that the IBBI also back these changes with follow-up regulations, including some extra points in the evaluation matrix for those plans with ESG focus.

This could effectively prompt investors to build ESG focus into their resolution plans for the stressed assets To start with section 30(2) of the Insolvency and Bankruptcy Code, which deals with the sub mission of resolution plans, could be amended
by the government, the paper proposed.

“This would align with the broader aim of preserving the economic value of companies, promoting sustainable business practices and considering the interests of a lar ger group of stakeholders,” it said. The IBBI, through regulations, could set out specific ESG criteria to be considered and the process for their integration into resolution plans, according to the paper. “This approach would provide flexibility, allowing for the consideration of ESG factors to be tailored to the circumstances of each case and sector. With due process of time and experience of incorporating such criteria, such ESG factors may be made mandatory,” it said.

The paper also recommended voluntary commitment by the corporate debtors to integrate ESG considerations into the insolvency process.

It said the judiciary could also “play a significant role in integrating ESG considerations into insolvency and restructuring processes by interpreting existing legal provisions in a way that incorporates ESG principles”. At the same time, there needs to be a concerted effort to bolster the understanding and capacity of insolvency professionals, as well as other relevant stakeholders, to deal with ESG issues through dedicated training programmes and
resources, the paper said.

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